LOUISVILLE — A state contractor accused of lavishly spending taxpayer money said it will hire a new interim chief executive officer by the end of this month and will review its spending closely.

Dr. Larry Cook, chairman and CEO of Passport Health Plan in Louisville, told reporters after the Passport board met behind closed doors Thursday that the board took a series of actions to address questionable spending and conflicts of interest.

Passport, which began in 1997, manages Medicaid, a state and federal health care program for the poor. It serves 164,000 people in 16 counties in the Louisville area. During the past three years it has received $2.5 billion in federal and state tax money.

"We have made some mistakes. We apologize for those mistakes and we're going to correct those mistakes," Cook said.

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But Gov. Steve Beshear, in a written statement, said the Passport board did not go far enough to address some of the problems at Passport, which has the state's largest contract.

State Auditor Crit Luallen highlighted spending and conflicts in a recent scathing audit of Passport.

The audit examined finances at the non-profit during the past three years and found that Passport's four employees and some of its board members had spent more than $230,000 on travel, gifts and entertainment, and more than $1 million on public relations and lobbying. The audit also questioned the salaries and compensation of some of Passport's staff.

Cook said he will step down as CEO when the board finds an interim director. He could continue to serve as chairman of the board until June 30, 2011, when he will retire from his current position as an executive vice president at the University of Louisville. But Cook noted that he serves at the pleasure of the board and could step down before his retirement.

"It is up to the board to determine what is best for the organization," he said.

Cook said the two main executives of Passport — executive vice president Shannon Turner and associate vice president Nici Gaines — will remain in their posts for now, and no action was taken on their employment during Thursday's meeting.

Cook said that because Passport is so small, it would be difficult to run the program and change its governing structure without Turner and Gaines. In the state audit, many of the traveling and meal expenses were attributed to Turner and Gaines. In addition to their salaries, Turner and Gaines had consulting contracts with Passport's main subcontractor. The consulting contracts have been terminated, Cook said.

Other actions taken by the board to address concerns raised in the audit include:

■ Requiring staffers to get pre-approval from the board for all travel and meal expenses.

■ Reviewing all lobbying efforts to determine whether Passport should continue to use lobbyists.

Cook said the board thinks that many of the travel and meal expenses cited in the audit were for legitimate business purposes. If some of those expenses were not appropriate, Passport might have to repay the state, he said.

But Beshear in his statement said all travel and expenses not directly related to patient care should cease immediately. He added that no money should be spent on lobbying.

"We expect an immediate freeze on any expenditures for lobbying and any other expenditure not directly related to medical care for Medicaid recipients" until the Cabinet for Health and Family Services, which oversees Passport's contract, and the new Passport management can address those issues, Beshear said.

He also called for a "top to bottom" restructuring of Passport.

"Obviously a new CEO is needed at Passport, but any candidate for that position should be reviewed by the cabinet to make sure there are no potential conflicts of interests, allowing the interim CEO to make it his or her first and only priority to clean up this mess," Beshear said. A new CEO is important, but it is also "essential to have a top to bottom change in management and a total reorganization in the governing structure of Passport," Beshear said.

Other issues raised in the audit, including whether the five original investors in Passport are receiving preferential treatment through grants and other monetary benefits, were not addressed by Cook in his statements to the media Thursday or in a news release.

At least one of the minority partners in Passport called for more immediate action before Thursday's board meeting.

In a letter obtained by the Herald-Leader, Michael Gough, chief financial officer of Norton Healthcare, asked Passport to make sweeping changes to its management and board structure and called for "clear and decisive actions." Norton Healthcare has a 13 percent stake in Passport. But 11 of the 16 board seats are held by the University of Louisville and its affiliates.

The letter, dated Wednesday, asks that the board consider that Cook step down as chairman of the board and CEO and that the Cabinet for Health and Family Services and the Department of Insurance have a say in the hiring of an interim chief executive. Gough recommended that the executive not have any ties to any of the partners on the board. In addition to the University of Louisville affiliates, the other minority shareholders are the Louisville/Jefferson County Primary Care Association and Jewish Hospital.

Gough also strongly recommended a host of other actions suggested in the audit, including a complete financial audit, a review of the ownership and governance of Passport, and tightening and strengthening of Passport's policies.

"We viewed the outcome of what happened today as a great start, but more work needs to be done," Steve Menaugh, a Norton Healthcare spokesman, said Thursday night.

Cook said that the board was able to meet for only two hours Thursday and that more needed to be discussed and reviewed. Cook said Passport will meet with officials of the Cabinet for Health and Family Services soon.

"Some changes will come about more quickly than others," Cook said. "Some will require a more deliberative process. But I assure that each (auditor's) finding will be addressed in an efficient, deliberative and expedient fashion."